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It is without question that the Ontario deficit, if no actions were taken, would have continued to grow at a staggering pace. In the recent 2012 Budget there were a lot of actions taken by the provincial government in order to balance the province’s finances. They believe they have derived strategies to – by 2018 – eliminate the province’s deficit altogether.

Federally, for income under $42,707 the tax rate is 15% and the highest tax bracket is income over $132,406 which is taxed at a marginal rate of 29%. Though combined provincial and federal taxes for earners in every province in every tax bracket is over 20%, the differences in the level of marginal tax provincially is staggering. With this additional 2% – in Ontario – high income earners will be paying a combined 49.5% on their highest bracket of taxable income.

This new tax was the result of a compromise between the Liberals and NDP in order to avoid a spring election after the budget was first proposed. According to provincial finance officials, approximately 23,000 people in the province will be affected by this new tax which represents a very small portion (roughly 0.2%) of total tax filers in the province. This 0.2% however already pay significantly more tax and it is expected that if they were to leave their incomes unadjusted (which is not very likely) the new tax will generate between $440M and $570M in revenue for the province annually. This is an average of around $19,000 for each taxpayer affected.

For an Ontario CEO, however, with average earnings around $8.5M (according to Canada’s top 100 in compensation), these individuals will pay around a quarter of a million more annually in provincial taxes under the new regime.

For individuals expecting to receive large amounts of taxable income from a variety of sources (from selling a business, significant investment income, inheritance, etc) there is the chance that they will leave the province to a more tax friendly place: Alberta. Alberta, as you can see from the chart on the left, is the only province in Canada which taxes all levels of income equally – at 10% - a lower rate than can be seen in the majority of Canadian provinces beyond the lowest tax bracket. As re-location may be out of the question – or unreasonable – for many Ontarians facing the new tax a re-allocation of funds is very probable.

The many strategies available for those exposed to this increased tax are varied and wide-ranging. They include the use of family trusts (to shift income to the hands of lower-income family members); many may also consider the option of using testamentary trusts in their wills which will allow their heirs the option of reporting less on their individual tax returns. If only slightly over the threshold you may see an increase in charitable donations or RRSP contributions.

For salaried employees in the province there are many ways companies can adjust the way executives are compensated. By adjusting the compensation mix so it weighs more heavily in stock options – with longer vesting periods – they can lower their taxable income as these aren’t taxed until they are exercised.

It is expected, as previously mentioned, that the tax aims to bring in between $440M and $570M in tax revenues annually for the province – that is assuming none of these high income earners adjust their portfolios, earnings, or relocate outside the province.

The actually revenue to be brought in by the tax will most likely be significantly less than expected – and most likely will not do much to fix the $15.2B deficit in the province.